Tabb Survey: Swap Participants Air Discontent With SEF Rules

The jury is still out on whether SEF rules will produce a positive outcome for the swap market, and some participants are shifting to alternative instruments, according to Tabb Group's fourth SEF Industry Barometer.

Swap market participants expressed discontent with the final SEF rules and have connected to fewer SEFs than originally planned, reports Tabb Group in a new survey.

Most market participants have connected to three or four SEFs, though they originally planned to connect with between six and eight, according to Tabb's fourth SEF Industry Barometer (purchase required). However, participants may have overestimated the number of SEFSs they require. Liquidity concentration and the lengthy SEF onboarding process are factors driving SEF adoption.

Though 21 SEF applications are temporarily registered with the CFTC, liquidity is concentrated in only a few venues, according to the SEF Industry Barometer. The report are based on interviews with 130 market participants. Dealers and buy-side firms comprising 50% of the responses, while trading venues (SEFs and exchanges) accounted for less than one fifth.

SEFs have used the Made-Available to Trade (MAT) self-certification process to list standardized products on their trading venues. But industry participants told Tabb that it's premature to say whether that self-certification process had produced the desired outcome.

Meanwhile, the industry is split on the idea of additional MAT mandates; only 53% expect more mandates to emerge in the second half of this year.

Seeking alternatives
Now that the swap rules are implemented, more than 63% of survey participants said they are more inclined to use swap alternatives such as cash and swap futures.

Despite the intentions of regulators to expand the swap market on regulated platforms, the swap market may shrink in response to the new SEF rules. "Industry confidence in the SEF rules having a positive impact on the swaps market is increasingly waning," wrote Tabb fixed income research director Anthony Perrotta and research analyst Colby Jenkins wrote in the report.

Nearly half the respondents indicated they are trading fewer swaps as a result of the SEF trading rules, and they were pessimistic about the impact of the rules. The authors said this was consistent with previous Tabb Barometer results. Fifty-two percent of the respondents expect the overall swaps market to shrink over the next five years, while 38% expect it to expand.

When asked why SEF volume has been slow to materialize, 63% of respondents said the volume has shifted from standardized to nonstandardized swaps. Yet 45% see the cost of clearing and SEF trading mandates playing a role in disappearing volume. Some respondents said that volume has shifted to futures, and a few cited an exemption for package trades as a contributing factor.

A key finding is that the jury is out on the MAT certification; 61% told Tabb that it was too early to tell, while more than one-third said contracts with the right amount of liquidity had made it on to SEFs via the MAT process.

Dealer-to-customer platforms are perceived to have the edge from the final SEF rules, and their business has steadily grown from the MAT mandates, according to Tabb's analysis. In rates, buy-side customers believe that certain D2C venues -- Bloomberg, Tradeweb, and TrueEx -- have the early advantage, while ICAP and Tullet Prebon are the leaders among the interdealer platforms.

Market participants are seeing more concentration among the SEFs that offer trading in credit default swaps, the survey reports. Buy-side firms cited Bloomberg, MarketAxess, and Tradeweb as the top D2D platforms in CDS; ICE for exchange and ICAP as an IDB were also noted.

However, this could change as users consider alternative protocols. Request for quote (RFQ) is the main execution protocol, but more than 50% of participants anticipate changing their protocol in the next six months. Currently, RFQ has 81% of the market, CLOB has 17%, and request-for-cross has 2%, according to Tabb. As users seek alternative protocols, by 2015 market participants expect the electronic RFQ to account for 40% of the market, CLOB for 31%, voice RFQ for 24%, and other protocols for 5%.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio